Inflationary pressure still low

Based on final GUS data, CPI inflation went up to 1.7% YoY in May vs. 1.6% in April, in line with the GUS flash estimate and below the market consensus (1.9%) and our forecast (1.8%).

Inflation boosted by higher dynamics of fuel prices

Inflation was driven up (by 0.4 pp) chiefly by higher dynamics of fuel prices, which went up to 9.2% YoY in May vs. 1.4% in April. This was a result of a marked rise in fuel prices (+5.6% MoM), caused by a sharp rise in global oil prices, as well as the depreciation of the PLN against the USD. Therefore, in May the average price of Brent crude oil in PLN was up by 13.5% compared to April. The marked rise in oil prices was to a large extent connected with D. Trump's decision to pull the United States out of the Iran nuclear deal, which in fact means that the US sanctions on Iranian petroleum exports are reimposed.

On the other hand, inflation was driven down (by 0.3 pp) by lower dynamics of prices of food and non-alcoholic beverages (3.0% YoY in May vs. 4.1% in April). This resulted to a large extent from a slower rise in meat prices (mostly due to lower prices of pork, the pork market being in the downward phase of the cycle), fruit prices (better early fruit crops this year), as well as dairy, eggs and oil and fats prices. Higher dynamics of bread and bakery products prices (caused by rising global cereal prices) and vegetable prices, had an opposite impact.

Inflation was also driven down by lower core inflation which, in accordance with our estimates, dropped to 0.5% YoY in May vs. 0.6 in April. The decrease in core inflation resulted mostly from lower dynamics of prices in "communication” category (-1.9% YoY in May vs. 0.1% in April), resulting from the high base effects caused by last years' increase in prices of telecommunication services (see MACROpulse of 12/06/2017).

Inflation clearly below inflation target

In our view, the decrease in core inflation, which has continued since February this year, indicates lack of inflationary pressure in the economy. However, we expect a slight increase in core inflation in subsequent months. It will be related to growing cost and demand pressure along with the moderately fast increase in nominal wages, forecasted by us. Taking into account continuing lower dynamics of food prices and higher dynamics of fuel prices we estimate that the average annual inflation rate will amount to 1.6% in 2018 vs. 2.0% in 2017, and in 2019 it will drop to 1.3% (see MACROmap of 11/06/2018). Inflation running clearly below the MPC's inflation target supports our scenario according to which the first interest rate hike is to be expected not earlier than in March 2020.